I’d buy this ASX share this week

Tristan Harrison | August 24, 2020 8:05am | More on: BUB

Image source: Getty Images

If I had to pick which ASX share I’d buy this week, other than last week’s pick, it would be Bubs Australia Ltd (ASX: BUB).

A quick overview of Bubs

Bubs is best known as an infant formula business. The company was set up in 2006 by current-CEO Kristy Carr.

The ASX share’s main range of products is a goat milk derived infant formula. Three years ago Bubs acquired NuLac Foods, Australia’s largest producer of goat milk products, including CapriLac, a leader in goat milk, powder and yoghurt, and Coach House Dairy, a premium range of Jersey milk products. That acquisition guaranteed exclusive supply of locally sourced fresh goat milk from Australia’s largest herd of milking goats.

Bubs also owns its a Chinese-approved manufacturing facility called Deloraine.

I think Bubs is a great buy for a number of reasons:

International growth

Entering the global market can turn a consumer business from being a decent opportunity to one with much larger potential. Look how much further A2 Milk Company Ltd (ASX: A2M)has grown because it is servicing the Asian and USA markets.

Bubs is doing a really good job of getting its foot into the door of international markets. We can see the growth in the ASX share’s June 2020 update a few weeks ago.

In June 2020 we saw Bubs’ China direct sales increase by 37% – this now represents around a fifth of total sales. Its ‘other export’ sales were up 71% in the fourth quarter of FY20, largely helped by the launch into Vietnam. Other international sales accounted for 9% of total sales in FY20.

Asia is a much larger total addressable market for Bubs compared to Australia. This region alone could be enough for the company to be a long-term market outperformer.

I like the ASX share’s recent moves of launching grass-fed organic cow infant formula as well as a range of vitamin and mineral supplements. Both of these segments could become material for Bubs in the next few years as their distribution grows across various stores.

Defensive, essential product

I think this COVID-19 period has shown us how important Bubs’ products are to families. Nutrition is essential, it’s not a discretionary item. I think Bubs’ existing revenue base is more defensive than some investors may give it credit for.

We saw in the FY20 third quarter how much demand there was for Bubs’ products when households were stocking up. The ASX share’s revenue grew by 67% compared to the prior corresponding period and it went up 36% on the previous quarter.

Rising profit margins

An ASX share can generate strong returns when there is a combination of strong revenue growth and rising profit margins.

In FY20 the total revenue rose by 32% to $62 million and the ‘normalised’ gross profit margin improved by 3 basis points, according to Bubs.

What’s most exciting is that infant formula, which has a gross profit margin of around 40%, is becoming a bigger part of Bubs’ total sales. In FY19 it made up 43% of total revenue, in FY20 it was 55% of total revenue. In FY20 infant formula revenue increased by 69%.

Margins could rise further as Bubs grows into Singapore, Hong Kong and Malaysia.

Near-term profitability

Reaching profitability is one of the most important things for a business to convince investors that it’s on the right path.

In FY21, excluding any residual COVID-19 adverse impacts, The ASX share expects to achieve profitability at the normalised earnings before interest, tax, depreciation and amortisation (EBITDA) level. That would be a very promising step.

Bubs thinks the group margin will be further enhanced by optimised product mix, the highest and best use of the milk pool allocation and enhanced value chain.

Foolish takeaway

Bubs could see growth in every segment and every geographic region in FY21. I think there’s a lot of promise for Bubs over the next 12 months and particularly the next five to ten years. I think Bubs is a very exciting business which is worth owning for the long-term, I’d be happy to buy it this week.